Get the firm's perspective on important topics that may impact your personal and business tax situation.

I wrote a blog about why I started my practice earlier in the year, and my explanation mostly pertained to my past experiences at different firms and companies. I also discussed the need for how CPA firms practice should change regarding their approach to providing client services, but I didn’t elaborate on what that really meant because I couldn’t really define it without using former words which may now be obsolete in this now evolving industry. Our industry is currently in a place where new words and definitions are needed since the CPA firm practices are being challenged by new technology, law changes, and how to attract the next generation to the practice. In that short time since writing my initial blog, new words have emerged to describe the next era CPA firm.

Technology disruption comes to accounting!

With the advancement in technology, words like artificial intelligence (AI), data analytics, process automation, and tax technologists are now associated with the accounting industry- all relating to the need for firms to be able to provide consulting and compliance services that includes strategic advice and planning from data analytics software. As Ernst & Young validates in a recent article…these changes “create real-time data, which businesses need to extract, analyze and validate to ensure the appropriate tax rules are applied to the information it generates.” Technology advancement also challenge firms to advance their operations to attract the talent with the skills to provide tax expertise and obtain the knowledge to utilize complicated tax and research technology and integration software.

There’s also a change expectation on tax professional skills as clients will demand a tax adviser with a broad background in complex tax and accounting knowledge to provide valuable services. With technology providing real time data, professionals will be expected to analyze and provide strategic tax advice in a timely manner. My experience in professional services range from financial services to state tax consulting. I’ve worked in multiple tax environments with varying experiences that has aided in my ability to make strategic decisions on complex tax situations. Tax professionals with various tax work backgrounds, like myself, are now able to add value to clients’ service experience as opposed to being hindered by a restrictive job title.

Throughout my career, I questioned why firms place their client services in a generic box instead of providing the service clients value for their particular business needs. I also thought there should be an easier way to provide valuable services and increase revenue while maintaining costs. I wasn’t sure of what new advances would help with this issue, until now!

So why is technology disruption good for M.S. Phelps, CPA, PLLC?

Our expertise range from basic tax management and accounting services to more specialized strategic tax services, such as state & local income and transaction tax compliance and consulting services. Our new integrated software platform would allow access to the same firm operations solutions as larger firms. This infrastructure allows us to perform business, accounting, and tax services while securely managing documents and workflow without all the unnecessary and costly processes. In addition to partnering up with a seasoned team of tax professionals, tax management and accounting services are provided using high ranking accounting solutions technology which give clients options to participate in processes, access to deliverables and advice from accountants at their discretion. Lastly, real time tax research analytics and guidance technology is utilized by tax professionals to apply the latest tax law changes to clients’ tax strategies and reporting requirements.

With the aid of technology, firms as small as mine can provide accounting and tax services at the highest service levels, and affordable cost, without sacrificing quality.

I recently joined a conference call with the Multistate Tax Commission who oversees the regulation of state corporate income tax, which includes provisions on how to recognize taxable business income in a state. The call was for designated members by state to vote on current amendments to an important provision – UDITPA (Uniform Division of Income for Tax Purposes), Article IV, Section 17 - specifically to change the method of sourcing intangible sales; to re-define business income to include ‘constitutionally apportioned’ income which also expounds on intangible property sales; and lastly to rename sales as receipts which I’m assuming will soften the tangible aspect of defining a transaction? Or could it be a way to distinguish sales taxable sales from income taxable sales, to simplify identification for tax purposes? The actual goal, according to the commission, is to reflect changes to the transactional and functional test requirements when considering taxable income but, either way, of course the amendments passed quickly and with flying colors…..Why?

This is an attempt by the commission to fill the void of states difficulty to make claim to service receipts (formerly known as sales) - particularly those earned by out-of-state companies to their instate consumers - by putting some parameters around transactions that don’t have a physical link to a state; metaphorically forming walls around a sale just enough to establish substantial nexus. The amendments are described as follows:

Sourcing Change from Cost of Performance to Market Based

For transactions other than sales of tangible property, the provision has been changed from sourcing service revenue/other intangible receipts based on cost of performance, which designates the transaction to the state where cost originates, to the market-sourcing approach which designates such revenue to states where the consumer will ultimately benefit from the use of such services or intangible property.

Change in Definitions of Business Income and Sales

Business income is now defined as apportionable income, to recognize any income generated from transactions and activity in the regular course of trade or business as income that can, under the Constitution of the United States, be legally assigned (apportioned) to a state; and income arising from tangible and intangible property if acquisition, management, employment, development or disposition of the property is or was related to the operation of the taxpayer’s trade or business.

The definition of sales has been upgraded to emphasize the inclusion of revenue received from transactions and activity in the regular course of the taxpayer’s trade or business as well. Thus reforming the name from sales to receipts.

Both changes have been made to establish the intent on how states will impose tax filing requirements based on the transaction activity that generated the apportionable income, more so than the physical presence attached to the transaction.

It’s Like Déjà vu….

When I read the amendments, and their over emphasis of ‘apportionable income under the Constitution of the United States’, I’m reminded of the original issues that gave rise to this regulation when the threat by Congress to restrict states’ right to tax arose. The UDITPA provision was born out of the need for states to come up with a uniform way of taxing businesses that are non-discriminatory, yet fair in the state’s right to tax. Although it has been amended several times (last amendment was in 1971), a new era has dawned in the world of e-commerce where the argument for why a state should claim jurisdiction on who and what to tax - no matter where the sale or service originated - need to be justified. Since the Supreme Court has been reluctant to even hear cases on this matter, this particular conference call seems reminiscent of what may have urged the commission to provide a resolution to their tax jurisdiction problem in the 1950s; to provide a remedy so Congress would stay at bay. The question now is, will this be enough to appease tax lawmakers this time to not expand restrictions on state taxable income, or do they even care to rule on the subject at all?

Who will immediately become vulnerable to these changes?

If you are an out-of-state business who sell, rent or license intangible products or services online, you may need to re-evaluate your business activities to determine any potential tax responsibilities in the future. If you are a company who base your state tax planning around the cost of performance sourcing strategy, there’s a high probability that tax provision adjustments will be needed.

Melinda has practiced multistate tax compliance and consulting for ten years. Her experience includes working at Big 4 and regional firms where she engaged in multiple state tax compliance and planning projects for fortune 500 companies. She also worked in industry where she was instrumental in restructuring the tax department to implement state income tax processes and procedures. As a sole practitioner, she helps multi-national corporate clients with compliance responsibilities, perform nexus studies to determine tax exposure, provide tax resolution services to clients who need help to restore good standing with state and local tax agencies, and help companies reduce their tax liability through proactive tax reduction strategies and planning.

To determine the best solutions for your tax situation. Please call to schedule a consultation with M.S. Phelps, CPA, PLLC - 313.757.1440.

DISCLAIMER: All blogs and articles posted by authors from M.S. Phelps, CPA, PLLC are for information purposes only, and should not be taken as tax, legal or financial advice. Any reliance on information given should be confirmed with your tax advisor and/or attorney prior to making any decisions based upon our posts. Should you rely on any information given by our posts, M.S. Phelps, CPA, PLLC is not liable for the outcomes as a result of your decision to act upon blog posts without first seeking professional advice. M.S. Phelps, CPA, PLLC has the right to change how we manage or run our blog, and the focus or content of our blog at any time.